Saudi Aramco’s IPO: Why The Record-Shattering Listing Has Its Risks Too

Yasmin Rasidi

From November 17 to December 4, Saudi Arabia’s oil giant Saudi Aramco will list its shares on the Riyadh stock exchange, making it the world’s biggest initial public offering (IPO). The company set a valuation worth $1.7 trillion, below $2 trillion the kingdom’s prince sought.

Chinese’s e-commerce giant Ali Baba IPO is the globe’s biggest as it garnered $25 billion in the offering in New York in 2014, Reuters reported.

Saudi Aramco’s IPO will be held amid the ongoing tension in the Middle East following the drone attack on Saudi Aramco’s oil facility last September and the global call for the use of renewable energy.

The world’s most profitable firm said it would only release 1.5 per cent of its shares or around three billion shares, priced between 30 riyals and 32 riyals, as Reuters wrote. The oil firm has appointed Goldman Sachs, Citigroup, Morgan Stanley, and JP Morgan as underwriters.

Previously, Saudi postponed the IPO plan

Saudi Aramco has planned to sell its shares to the public since the firm announced the offering proposal in 2016. However, it had to postpone the idea due to some factors, such as the sharp decline in the global oil price. The location of the listing was then still unclear. Saudi Aramco once considered the Wall Street, bourses in Asia (the primary market of Aramco oil), or a local Saudi bourse for the listing location.

Initially, Saudi Aramco was estimated to release five per cent of its shares in two stock markets (two per cent in the Tadawul Saudi, and the remaining three per cent in overseas bourse). However, Saudi Aramco then revised the plan by ruling out an overseas listing.

In mid-September, ten drones attacked two Aramco’s refineries. Saudi Aramco suffered a 5.7 million barrel a day lost due to the incident (which is equal to five per cent of the global oil supply).

Yemen’s Houthi rebels claimed responsibilities for the attack. However, the US accused Iran of masterminding the attack despite providing no supporting evidence.

The drone attack almost forced Saudi Aramco to delay the public offering. The company’s officials were not optimistic that the oil giant would recover its production quickly after the aggression.

“The company continues to engage with the shareholders on IPO readiness activities. The company is ready, and timing will depend on market conditions and be at a time of the shareholders choosing,” Aramco said in a statement as quoted by CNN.

Saudi Aramco contributes to ten per cent of global oil demand, producing more than ten million barrels of crude oil per day, Marketwatch wrote. The company’s net profit in 2018 reached $111 billion, five times bigger than that of Exxon, Apple and Shell combined.

The Risks Saudi Aramco Is Facing

Saudi Aramco’s offering may be the largest in history. However, the offering is not risk-free and there are several factors to consider.

The drone attack last September disrupted 50 per cent of the kingdom’s oil production. The ongoing conflicts in the Middle East have made some investors think twice before buying the company’s shares.

“They are the best assets in the world, but I have no interest in owning Aramco given the security risks,” Ben Cleary, Asia chief executive officer at Tribeca Investment Partners, told SCMP, adding that the tensions in the Gulf show no signs of receding.

Analysts from 16 banks have provided a valuation of Saudi Aramco, ranging from $1.1 trillion to $2.5 trillion, as Saudi’s Prince Mohammed bin Salman expected. However, $1.5 trillion is considered the most realistic value given the previous incident and Saudi Aramco’s recovery following the intrusion.

Transparency and professionalism are also among the main issues before the IPO. There is no specific data about the size of Saudi oil reserves as Saudi Aramco has not handed over the audit of its reserves to an independent review since 1980.

Saudi Aramco’s management team has little experience in running a public company, dealing with investors, and complying with complex regulations and procedures, CNBC wrote.

The demand for cleaner energy to curb the impact of climate change will pose a risk to Saudi Aramco’s business. As many companies are going greener, Saudi Aramco must be able to adapt to the current situation and demand.

Saudi’s Prince Mohammed bin Salman expects the IPO will raise billions of dollars to help the kingdom to curb dependence on oil. Per December 31, 2016, and 2017, the hydrocarbon industry contributed 43 per cent to the country’s GDP.

Saudi is busy developing alternative energy sources. In 2018, the oil-rich nation built a renewable energy facility to generate electricity in the next ten years, including 40 GW of photovoltaic solar power, three GW of concentrated solar power and 16 GW of wind power, Reuters reported.